What Are Cryptocurrencies? A Beginner’s Guide

What are cryptocurrencies?

Cryptocurrency is a digital currency developed to work as a medium of exchange. It uses cryptography to verify and secure transactions and control new units of a particular digital currency.

Cryptocurrencies are built on blockchain technology, which is a distributed ledger implemented by a distributed network of computers.

Cryptocurrencies are different from fiat currencies like the USD or the British pound because any central authority does not administer them. It is entirely decentralized, making them potentially impenetrable to government intervention.

How does cryptocurrency work?

Cryptocurrencies run on software networks, where various computers run separate copies of the same program. All the computers are linked, but no one computer controls the entire network. Hence it is called a decentralized network.

The function of these networks is to process transactions and maintain the database that records and stores those transactions. In general, transactions are grouped into “blocks,” which are then connected in chronological order in a long, unbroken “chain.” Therefore, the technology is called the blockchain.

Who controls these computers?

Anyone can download these software programs as they are open-source programs. The database where all these transactions are recorded is called the ledger and is visible publicly to anybody.

It ensures that nobody on the network is counterfeiting the underlying cryptocurrency or double-spending the same bitcoins. Every computer collectively agrees upon the transaction history, so it can’t be changed later.

The people running these programs receive a monetary reward upon completion. They compete against each other to batch together a block of transactions. Whoever completes the network’s first block earns a batch of newly minted bitcoins. It is a process of mining. It incentivizes people to maintain the network and is how new bitcoins are produced.

Who started the cryptocurrency revolution?

Satoshi Nakamoto( pseudonym) released a nine-page paper describing a new “electronic cash” system called bitcoin in October 2008.

Bitcoin promised an alternative to the existing fiat currency and a financial system. It struck a nerve with most people in the wake of the global financial crisis. Crypto proponents believe it is a financial revolution.

Types of cryptocurrency

Cryptocurrencies can be classified into the following two groups: Bitcoin and Altcoins.

Coins designed to be used as a currency are created on their unique blockchain. For example, Ether is a cryptocurrency based on the Ethereum blockchain.

Bitcoin is known as the primary cryptocurrency. Any blockchain-based cryptocurrency that isn’t Bitcoin is called Altcoin. The Altcoin was coined as a shorthand for “alternative to Bitcoin.” Ethereum, Litecoin, and USD Coin are examples of altcoins.

Some cryptocurrencies, like Bitcoin, have a limited number of coins that help develop demand and reinforce their perceived worth. For instance, the maximum supply of Bitcoin is capped at 21 million.

Are cryptocurrencies legal?

There is a growing need for clarity concerning the legal implications of cryptocurrencies and blockchain technologies. As governments worldwide, central banks, regulatory agencies, and other financial institutions are trying to understand the value and meaning of digital currencies. Individual investors can make a good chunk of money investing in this new space. On the other hand, investors assume certain legal risks when buying and selling cryptocurrencies.

Much of the ambiguity of the legal standing of digital currency is because the space has only recently become popular compared with more traditional currency and payment systems.

For instance, the IRS has specified cryptocurrencies as property rather than currencies in the USA. Therefore, individual investors are accountable to capital gains tax laws when reporting their cryptocurrency profits and expenses on their annual tax returns, regardless of where they purchased these digital coins.

How do I make money with Cryptocurrencies?

Buying bitcoin or cryptocurrency is not like buying a stock or bond. When you hold bitcoin, you don’t own a part of a company. The only best way to make money with bitcoin is by buying it at a lower price and selling it to somebody else for a higher price.

There is another emerging part of the crypto market called “DeFi,” which is short for decentralized finance. These are like regular banking services that allow you to lend out or borrow against your crypto holdings.

For instance, if you lend your bitcoin, you can earn interest that typically ranges from 5% to 20%. If you borrow, you can take the borrowed crypto and invest it elsewhere in the market, again hoping to sell it for a higher price.

Advantages and disadvantages of cryptocurrency

Transactions of cryptocurrencies are a rapid and straightforward process. Bitcoin, for instance, can be exchanged between two users using only a smartphone or computer with internet access. Public and private keys and different incentive schemes such as proof-of-work and proof-of-stake are used to protect these transfers. Payments in cryptocurrencies are growing widely among large corporations.

Another biggest advantage is that every cryptocurrency transaction is registered in a public ledger known as the blockchain, which is the technology that makes it achievable for it to exist. This allows users to follow the history of cryptocurrencies to stop them from spending coins they don’t own, copying transactions, or undoing them. There are no transaction costs because blockchain intends to eliminate intermediaries like banks and internet marketplaces.

However, there’s a chance of misplacing your virtual wallet or losing your coins if you’re not careful. There have also been internet frauds and thefts from the websites that exist to store cryptocurrency on the internet. Because the value of cryptocurrencies like Bitcoin is very volatile, some people are reluctant to convert “real” money into Bitcoin. It is one of the most significant disadvantages.

Cryptocurrency exchanges are prone to cyber attacks just like any other technology company. It might result in losing all your investment forever.

Scams are always a possibility within the cryptocurrency industry. Most scammers frequently use social media platforms to deceive consumers into making these investments. If you believe any such fake profiles have targeted you, you should contact concerned authorities like Federal Trade Commission (FTC) in the United States as soon as possible.

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